Presenting the Federated Hermes China Equity Fund
FOR PROFESSIONAL INVESTORS ONLY
In this fund in five we speak to Sandy Pei, co-portfolio manager, to look at the fund from five angles and see why investors should consider a dedicated China fund rather than a more general Asia or emerging markets offering.
Asset class
1
2
Process
3
Differentiator
4
Team
5
Goals
IMPORTANT INFORMATION
While only launched in July last year, the Federated Hermes China Equity Fund follows the investment strategy of the Federated Hermes Asia ex-Japan Strategy since January 2010.
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Described as a deep and diverse market, Pei says China has a low correlation with global equities bringing its own diversification benefits and given its size and scale she believes investors should consider holding it outside of traditional emerging markets or Asia ex-Japan funds.
“The end of the zero-Covid policy and the re-opening of the economy has cleared a lot of uncertainties, so the market is not just cheap but gradually we can see the revenues of companies growing again and earnings recovering,” she says.
With China being the only major economy that is expected to grow meaningfully in 2023, and the stock market trading at record low valuations to global equities, Pei says now is a compelling time to consider investing in China.
Investing using an absolute return mindset, Pei says volatility in China is a good thing because they are looking for mis-priced opportunities as markets become less efficient.
“We look for undervalued opportunities, meaning that it is quite common a stock will make it into our screen after a period of underperformance,” she says.
Adopting a concentrated, bottom-up approach to investing Pei says the style is best described as contrarian with a value bias.
Benchmarked against the MSCI China All Shares Index – which includes onshore and offshore China equities – Pei and co-manager Jonathan Pines have an investment universe of some 7,500 stocks which they reduce down to a high conviction portfolio of 30-60 stocks.
Source: Federated Hermes, data as at 31 March 2023
Fund launch
20 JUL ’22
$28.8M
Fund AUM
85%
Active share
While volatility has been called good for the fund, Pei says “a big heart” is also needed to manage through it. However, she adds, because of the portfolio’s valuation conscious approach its stock positions tend to outperform during market downturns.
“There are very few value fund managers who have survived from that prolonged style headwind,” she says. “Our Asia ex-Japan Strategy was launched in 2010, and while we have faced difficulties if you take the 13-year track record, on an accumulated basis we are ranked as one of the top performers in absolute and relative terms.”
Having underperformed growth and quality as an investment style for the past decade, Pei believes the fund’s value style marks it out as being niche in the current market.
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment. RWC Partners Limited is authorised and regulated by the Financial Conduct Authority.
“The team started investing in offshore China in 2010 and China A-shares in 2021 so it is a market we know very well,” says Pei. “Our team members are from diverse backgrounds, including two Chinese speakers and one Korean speaker, and we have extensive experience of the local market and culture.”
Co-managers Pei and Pines have a combined 37 years of industry experience (Pei 13 and Pines 24).
Pei, who began her career at Federated Hermes as an analyst in the global emerging markets team in 2009, re-joined the group in July 2013 as a senior analyst responsible for idea generation for the Asia ex-Japan strategy, and become deputy portfolio manager of the strategy in July 2014.
Pines, joined the group in March 2009 as portfolio manager for Asia ex-Japan within the emerging markets strategy and has been lead manager of the Asia ex-Japan Strategy since its launch at the start of 2010.
1 Offshore China (HK & USADR) since 2010 and China A-share market since 2021
Working alongside Pei and Pines are three investment analysts and one dedicated ESG analyst.
In terms of end investors, Pei says the fund is most suitable for those who are patient and look for risk-adjusted returns over the long term.
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The underlying objective of the Federated Hermes China Equity Fund is to outperform the MSCI China All Share Index over a medium-to-long-term period.
“We want to make sure that we don’t lose a lot of money if we get the call wrong, and that we make a decent return if we get the call right and over the long run we will deliver good accumulated returns and at the same time beat our benchmark,” says Pei.
“We tend to outperform in bear markets and we think this helps our investors to stay invested rather than get shaken out during those market volatilities,” she adds.
The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Any investments overseas may be affected by currency exchange rates. Past performance is not a reliable indicator of future results and targets are not guaranteed. Investments in emerging markets tend to be more volatile than those in mature markets and the value of an investment can move sharply down or up. For professional investors only. This is a marketing communication. This document does not constitute a solicitation or offer to any person to buy or sell any related securities, financial instruments or products; nor does it constitute an offer to purchase securities to any person in the United States or to any US Person as such term is defined under the US Securities Exchange Act of 1933. It pays no regard to an individual’s investment objectives or financial needs of any recipient. No action should be taken or omitted to be taken based on this document. Tax treatment depends on personal circumstances and may change. This document is not advice on legal, taxation or investment matters so investors must rely on their own examination of such matters or seek advice. Before making any investment (new or continuous), please consult a professional and/or investment adviser as to its suitability. All figures, unless otherwise indicated, are sourced from Federated Hermes. Whilst Federated Hermes has attempted to ensure the accuracy of the data it is reporting, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions. Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on these pages. All performance includes reinvestment of dividends and other earnings. Federated Hermes Investment Funds plc (“FHIF”) is an open-ended investment company with variable capital and with segregated liability between its sub-funds (each, a “Fund”). FHIF is incorporated in Ireland and authorised by the Central Bank of Ireland (“CBI”). FHIF appoints Hermes Fund Managers Ireland Limited (“HFMIL”) as its management company. HFMIL is authorised and regulated by the CBI. Further information on investment products and any associated risks can be found in the prospectus, the fund supplements or the key investor information documents/key information documents, the articles of association as well as the annual and semi-annual reports. In the case of any inconsistency between the descriptions or terms in this document and the prospectus, the prospectus shall prevail. Details of the Manager’s Remuneration Policy and Sustainable Policies are available on the Policies and Disclosures page at https://www.hermes-investment.com/ie/hermes-ireland-policies-and-disclosures/, including: (a) a description of how remuneration and benefits are calculated; and b) Sustainability related policy and disclosures. These documents are available free of charge (i) at the office of the Administrator, Northern Trust International Fund Administration Services (Ireland) Limited, Georges Court, 54- 62 Townsend Street, Dublin 2, Ireland. Tel (+ 353) 1 434 5002 / Fax (+ 353) 1 531 8595; (ii) at https://www.hermes-investment.com/ie/; (iii) at the office of its representative in Switzerland (ACOLIN Fund Services AG, Leutschenbachstrasse 50, CH-8050 Zurich www.acolin.com). The paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1/am Bellevue, P.O. Box, CH-8024 Zurich. The information provided herein does not constitute an offer of the Fund in Switzerland pursuant to the Swiss Financial Services Act (“FinSA”) and its implementing ordinance. This is solely an advertisement for the Fund pursuant to FinSA and its implementing ordinance. The costs for hedged share classes will be higher than the costs for non-hedged share classes. Refer to the prospectus or offering documents before making any final investment decisions and consider all fund characteristics and not just ESG characteristics. Issued and approved by Hermes Fund Managers Ireland Limited (“HFMIL”) which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59. HFMIL appoints Hermes Investment Management Limited (“HIML”) to undertake distribution activities in respect of the Fund in certain jurisdictions. HIML is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. Telephone calls may be recorded for training and monitoring purposes. Potential investors in the United Kingdom are advised that compensation may not be available under the United Kingdom Financial Services Compensation Scheme.
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